Modelling work by Strutt & Parker has suggested that UK arable farmers are facing more than a 50% reduction in profits from harvest 2023, as lower commodity prices, higher working capital requirements and the drop in Basic Payments hit margins.
The forecast suggests that this will recover slightly in 2024 but remain significantly lower than the levels seen in 2021 and 2022.
Net margins in 2023 for the average arable farm are expected to be around £183 per hectare, down from £568 in 2022. This is due to inflationary pressures on input costs and the simultaneous drop in grain prices.
On farms achieving higher yields with lower fixed costs, the net margin could be as high as £364 per hectare, however, this is still 52% lower than comparable farms in 2022 and 42% lower than in 2021.
“Harvest 2022 was a profitable year for arable growers who purchased the bulk of their inputs before the massive increases in input costs and benefited from the significant increases in grain prices,” said Andrew Atkinson, farm consultant with Strutt & Parker. “But the huge rise in fertiliser prices which followed, along with declining commodity prices over recent months, means harvest 2023 could end up being one of the worst financially for a number of years.
“It is also worrying to see that while profits are forecast to rise a little in 2024, they are likely to be significantly down on where they were in 2021, which is before the extreme volatility which has characterised the past couple of years kicked in.
“Volatility is not new to farmers, but the extent of it really has been unprecedented over the past 24 months and it is this year where the pain will be felt on many arable farms. Not only did fertiliser prices skyrocket to about £1,000/t in Spring 2022, but feed wheat prices have dropped by nearly £150/t compared with Summer 22 levels and oilseed rape prices have plummeted from over £800/t in Spring 22 to around £350/t now.
“Arable farmers will be feeling like they have been on a rollercoaster and that looks set to continue. The forecast for 2024 is better than this season, but still worryingly low, which puts pressure on businesses to look for areas where they can improve financial and technical performance.”
Mr Atkinson said that were key areas for farmers to look at which could improve their net margins.
Budgeting and cash flow forecasting
While budgeting and cash flow forecasting may be difficult to find time for, it can help improve decision-making and manage risk.
Working capital requirements are expected to fall in 2024, however, they will still be around 25% higher than they were in 2021, and BPS payments will be around half of what they were at that time.
To reflect this, budgets should be reviewed frequently.
Set sights on the top 25%
High-performing businesses are expected to see net margins more than 75% higher than average farms in 2024. This highlights the value of farm management and attention to detail, with a combination of lower fixed costs and higher yields.
Reducing fixed costs
It is often the lower fixed costs which make the greater difference in financial performance, so finding savings in overhead costs is likely to be critical moving forward.
Changes do not happen overnight but even small changes can help make a difference. The starting point should be to assess your own costs and compare them with others, with data freely available from the Farm Business Survey and other organisations.
Agri-environment scheme income
There is still time for growers to sign up for a Countryside Stewardship Agreement with a 1st of January start date. The deadline is the 18th of August.
As well as this, more details on the Sustainable Farming Incentive are expected in June, potentially with additional payments for direct drilling, no use of insecticides, precision farming approaches and companion cropping.
A mix of these options has the potential to add around £60 per hectare to the net margins, although this will vary from business to business.
Standard receipts costs and net margins for average and high-performing farms
|£/ha||2021 (Average)||2021 (High)||2022 (Average)||2022 (High)||2023 (Average – estimated)||2023 (High -estimated)||2024 (Average – estimated)||2024 (High – estimated)|
The company’s volatility modelling uses a set of universal assumptions to provide an outlook for the sector. Alternatively, it can be tailored using a farmer’s own data, including crop area, rotation, yield, input prices and output prices to give a more accurate picture.
For more information go to www.struttandparker.com